The Government is proposing to allow those nearing retirement to buy extra units to boost their state pension but a proportion of those affected may face a dilemma – to go with the government or try and get more from a private annuity.
The new system was outlined this week by the pension minister Steve Webb who says it will allow those due to retire before April 2016 to buy more state pension. But it could present some pre-retirees, those not in the best of health, with a dilemma over whether to take the government deal or an enhanced annuity.
Where a potential retiree is in good health it is relatively easy to make a straight comparison with the state proposal.
Under the plan, a flat £900 contribution looks likely to buy a pound extra a week for life and, if you are in fine fettle, looks likely to be better than what you might get elsewhere.
But investment and planning firm Towry points out that those coming up to retirement, and who are in ill-health, may face a different calculation.
A so-called enhanced or impaired life annuity which pays out more than a standard annuity, due to a lower life expectancy, may deliver a better deal.
Andy James, head of retirement planning at Towry says: “The plan to increase your state pension by £1 per week for every £900 you put in is not a bad deal. When compared with an index-linked annuity, which does not increase in the same way as the State pension but is a reasonable comparison, Steve Webb’s suggestion is compelling and substantially better than anything on the market at the moment. Therefore, if the structure of these increased payments suits your retirement objectives, and you will be retired by April 2016, it is certainly something that should be considered.
“The major issue with this type of pension arrangement is that it takes no account of health. I would expect healthy people (particularly women who live longer) to find this an attractive offer. Those with lower life expectancies may still find annuity providers offering better impaired or enhanced rates.”
So there is the rub.
For many people due to retire, this may feel like a complicated financial calculation in which they may have to consider how long they will live. But it’s not that complicated. You should be able to compare what you might be offered from an annuity provider with what the government will give you for that £900 reasonably easily. There are an abundance of comparison sites around.
However, how many will crunch the numbers? For the groups affected, it will certainly make sense to shop around – and compare any annuity to the state pension offer. And certainly if you are looking at paying a sizeable chunk of extra money over to the state perhaps while working out your other retirement options, it may make sense to get some decent financial advice. This government offer is good news for those affected but as with a host of pension issues, it is not quite the no-brainer that it may have first looked like.